Improper Classification of Workers as Independent Contractors – the DOL issues new guidance on its Worker Misclassification initiative

Improper Classification of Workers as Independent Contractors – the DOL issues new guidance on its Worker Misclassification initiative

The classification of workers as independent contractors rather than employees is considered a huge problem nationwide by the U.S. Department of Labor and other federal and state agencies. The DOL has recently issued new guidance on its ongoing worker “misclassification initiative” and its view that the standards of the federal Fair Labor Standards Act should be applied across the board to determinations whether workers have been misclassified, which is considered to greatly broaden the scope of employment. Many more workers will be deemed employees rather than independent contractors under this stadard of review.

The DOL explains that when it determines whether a business can be deemed to “employ” an individual and thereby have certain duties to that individual under state and federal labor and employment law, it uses the FLSA definition of “employ.” This focuses on whether the worker is “suffered or permitted” to work by the employer, which turns on whether “economically dependent”. If a worker is economically dependent on a company, than that worker is an employee. By contrast, if the worker is really in business for himself or herself, then that worker is an independent contractor.

Applying the test of whether the worker is “economically dependent” upon, or is “suffered or permitted” to work by, an enterprise, is quite different than the common law test that was previously considered to apply in many instances. Under that common law test, a worker generally would be considered an employee if a list of factors, when analyzed individually, generally weighed in favor of determining that the person was an employee. Chief among these factors was a consideration whether the putative employer exerted control over the conditions and circumstances in which the worker performed the work.

Under the FLSA standard, the test does not focus on the control exerted by the hiring party but rather considers several “economic realities” factors, weighed qualitiatively and without uduly weighing one factor more than another. These factors are generally, with some variations in different courts: (i) the extent to which the work performed is an integral part of the employer’s business; (ii) the worker’s opportunity for profit or loss depending on his or her managerial skill; (iii) the extent of the relative investments of the employer and the worker; (iv) whether the work performed requires special skills and initiative; (v) the permanency of the relationship; and, additionall, as one of the factors (vi) the degree of control exercised or retained by the employer.

It may be easier to analyze these factors in theory than in practice, but the major point of this new DOL guidance is that, under the FLSA standard, the scope of employment is very broad. On regulatory review, many workers will be considered actual employees, although they have not been treated as independent contractors.